Credit can be one of life's greatest inventions. Everyone can benefit. Credit enables a farmer to purchase a new tractor from the local tractor store, so that he can work his fields to produce a crop that can be sold to consumers, and the proceeds from the sell can then be used to pay off the creditor. The tractor store gets a sell, the farmer gets a tractor, the consumers get a fresh crop and the creditors get a little compensation for being the enabler of the entire cycle. Without the credit, there would be no tractor sell and no crop for the consumers.
However, sometimes things just go wrong and credit can become a nightmare. It may have been a bad year for the farmer to plant the particular crop, there may have been a lack of rain, a surplus of rain, a late frost, etc. In this example, as well as in numerous other examples, good people with good intentions may find themselves in quite a credit predicament.
The financial industry has responded to this predicament in the consumer market by providing various services to help consumers get out of, or recover from, various credit predicaments in which they may find themselves. Some of the services available to help credit-trouble consumers include credit counseling, debt management services and debt settlement programs.
Credit counseling is a service that provides information programs and training to consumers to assist in the recovery from financial stress. Credit counseling centers help consumers to access their financial situation, develop a recovery, payment and spending plan, set financial goals and create an action plan for attaining such goals. Such centers can provide other services such as educational programs regarding budgeting or the like. Some credit counseling centers, as well as other companies, provide debt management services.
Debt management services typically focus on consolidating a consumer's debts and working with the consumer's creditors to setup a timeline for paying off of the debts. For instance, a typical debt management service includes identifying all of a customer's debt, negotiating with the credit companies to reduce the payments by lowering the interest rate, waiving late fees, etc., and then consolidating or rolling all of the customer's payments into a single, lower monthly payment that is provided to the debt management service provider. In general, debt management programs result in paying off 100% of the outstanding balance, requires the customer to close out all credit cards, and have an adverse impact on the customer's credit score. Debt management service companies are typically compensated by obtaining a fair share, or a percentage, of the amount collected on behalf of the creditor. Typical compensation for such services is in the range of 8% of the collected amount.
Another service provided to consumers is debt settlement. Debt settlement differs from debt management in that the service provider actually negotiates a debt reduction or a discount on the value of the dollars that are owed by the consumer. In general, in a debt settlement service, an attorney representing the debtor contacts the various creditors of the debtor. The attorney and the creditors settle on an amount owed which basically includes a discount on the dollars (i.e., paying fifty cents on the dollar). At the onset of providing debt settlement services, the consumer is typically instructed to stop making payments to his or her creditors but rather, to make payment into an escrow or prepaid debit account. Once the value of the account builds up to an amount likely to satisfy the creditor, the consumer's attorney offers immediate payment and reconciliation of the debt at a discounted rate. Because the customer is not paying their creditors, and average balances on all accounts are in the $15,000 to $20,000 range, customers often become greater than 180 days delinquent and are charged off by their creditors before settlement occurs. The typical fee to the consumer is 15-20% of the discount received by the consumer on their total debt. Similar to the debt management service, debt settlement service can disadvantageously have an adverse effect on a consumer's credit rating and generally require the consumer to cancel their current credit cards and/or accounts.
What is needed in the art is a method or service to help consumers recover from credit problems in a manner that does not impact their credit rating as significantly and that still allows them to have some access to credit.